GameStop Stock Made History, But It’s Not a Buy

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GameStop (NYSE:GME), a specialty retailer providing games and entertainment products, has been a protagonist in what could be a blockbuster movie — one named How to Fool Wall Street. It was the star of the meme stocks frenzy. Shares of GME stock have a 52-week range of $77.58 – $344.66, and closed yesterday at $82.64. But its highs and lows reach further than just stock prices.

Photo of the Gamestop (GME) logo On a Mobile Phone.

Source: Shutterstock / mundissima

What is dramatic about the GME stock is not that it has losses of around 40% year to date, but that it has collapsed approximately 74% off its historic 52-week high. And perhaps even more memorable, GameStop has written history — and gained bad publicity — as it has forced the Securities and Exchange Commission (SEC) to make changes to retail investing.

This meme stock frenzy is indeed a phenomenon that has given writers a lot of content to gather, analyze and use to write some very interesting books. But it couldn’t last.

GameStop: A Revolution in Retail Trading That Wasn’t

Gamestop was among the top meme stocks. Reddit pushed it to price levels that were not only unsustainable but were an epic bubble that eventually burst. And many investors rising the huge wave for GME stock made a lot of money.

I am not sarcastic — they did. But pushing a meme stock that high is what I have regularly called an example of the “Greater Fool’s Theory.” Fear of missing out (FOMO), fear uncertainty and doubt (FUD), and other emotions were supported by social media madness, boosting the pump-and-dump trading.

The concept of easy money, avoiding doing your due diligence and relying on an unknown social media group to provide quick profits for doing nothing are not only bad practices that should be avoided by sophisticated investors. They are also a part of the history of modern Wall Street. I argue that is part of a very negative era, one that fools novice investors into thinking there is a holy grail in investing when there is not.

Meme Stocks and GameStop Make SEC to Work on Proposals

Gary Gensler, the SEC chairman has stated that the events related to meme stocks and Gamestop have led to SEC working on four proposals. The first one is reducing the settlement period from two days to one day, a proposal that would significantly reduce risk. The other proposals are about transparency related to short selling; the equity markets’ use of practices like payment for order flow and dark pools; and “gamification” or “digital engagement practices.”

All these proposals by the SEC are steps in the right direction to protect the integrity of the stock market. I only wish SEC had taken these initiatives much quicker.

Gamestop Latest Q3 2021 Earnings

Gamestop in its third-quarter 2021 earnings report showed a year-over-year net sales increase of 29%, to $1,296.6 million versus $1,004.7 million, a widening operating loss of -$102.9 million versus -$63 million, and a widening net loss of -$105.4 million versus -$18.8 million.

Diluted loss per share was -$1.39 versus -29 cents and, notably, shareholders have been diluted in the past year, with total shares outstanding growing by 16.6%.

According to Simply Wall Street, Gamestop is expected to remain unprofitable over the next three years and its revenue growth of 1.2% per year is forecast to grow slower than the U.S. market.

Considering that GameStop’s gross margin has been in long-term decline, down about 3.9% per year, and its revenue per share has fallen for five straight years, things do not look bullish for this retail gaming stock.

Interestingly enough, Gamestop’s last quarter of positive earnings was the quarter ending on Jan. 31, 2021, when it reported a profit of $80.5 million.

Gamestop: Still Very Rich Valued

Data from MarketWatch shows that GME stock has a price to book ratio of 48.6, and a price to cash flow ratio of 170.78, which are considered too high. The price to sales ratio of 4.15 as a result of the stock price decline seems to be more rational, but still isn’t a bargain.

In anticipation of the Q4 2021 earnings report, GME stock does not offer any compelling reason to buy it. The revolution in retail trading proved it had no fuel to support it. On the other hand, concerns about fundamentals, logic, and valuation ultimately won.

On the date of publication, Stavros Georgiadis, CFA  did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.


Article printed from InvestorPlace Media, https://investorplace.com/2022/03/gamestop-stock-made-history-but-its-not-a-buy/.

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